What is the Red Sea crisis? Does it affect India?
Major shipping companies like Maersk and Hapag-Lloyd have temporarily halted their Red Sea routes due to increased Houthi rebel attacks in the Bab-el-Mandeb strait. This has caused a spike in shipping costs from Asia to Europe and could potentially lead to another inflation shock for the global economy. A key element in this route is the Suez Canal, which gives passage to about 12% of global trade and connects oil-supplying Gulf states to their customers in Europe and America.
Why are Houthis attacking ships?
Houthi rebels—embroiled in Yemen's decade-long civil war—have escalated their maritime attacks in response to Israel's bombardment of Gaza. In November, they hijacked a ship in the Red Sea using a previously unheard-of tactic, that is, by landing a helicopter atop it. The seizure involving a ship linked to an Israeli company marked a dangerous shift, exacerbating the already dire humanitarian crisis in Yemen. While they initially targeted only Israel-related vehicles, they have now expanded to any ship connected to Israel.
Does it affect India?
The crisis remained unnoticed until reports surfaced of drone strikes targeting cargo ships en route to India, carrying petrochemicals and oil. The US Central Command attributed the first attack to Iran and the second to Houthi rebels in Yemen. However, the Indian government has denied any potential impact on the country's trade. "The ongoing Red Sea conflict will have no impact on India's maritime trade with the rest of the world," Shipping and Waterways secretary TK Ramachandran said.
What are the alternative routes
To avoid the Red Sea, ships must travel an extra 3,000-3,500 nautical miles around the Cape of Good Hope, adding roughly 10 days to their journey. This detour could cost up to $1 million in additional fuel for each round trip between Asia and Europe. Insurance costs are also on the rise, further increasing overall shipping expenses. Another route is through Istanbul's Bosphorus Strait, but to reach there, all the goods have to cross the entire landmass of Turkey.
Inflation likely to be minimal
Rhys Davies, a former government trade adviser now working with consultancy firm Flint Global, acknowledges that Red Sea tensions have impacted freight costs. However, he believes the effect on inflation will likely be minimal, stating, "The effect feeds into the economy pretty slowly, taking about 12 months after the spike [in shipping costs]." "So if the disruption is time-limited, as we would expect, it will probably be drowned by wider disinflationary impacts."
Comparing current disruption to Suez Canal blockade
The current Red Sea situation is different from 2021's Suez Canal blockage caused by the Ever Given container ship. Back then, global supply chains were strained due to high demand for manufactured goods and lockdown restrictions. Today, inflation is cooling as central banks use higher interest rates to curb demand, and world trade volumes and economic growth have slowed.
US warns Houthis against Red Sea attacks
The Iran-backed group has been fighting with the internationally recognized Yemeni government since 2004. Yemen's government is not only backed by Saudi Arabia in terms of military but is also supported by the United States (US) and the West. On Wednesday, the White House released a statement in response to Houthi attacks in the Red Sea. "Let our message be clear: we call for immediate end of these illegal attacks and release of unlawfully detained vessels and crews," it said.
